Scribd
Upload
6 views2 pages

Bundling Strategies and Pricing Analysis

Bundling is more profitable in Scenario 2 due to negative correlation in demand between items, while mixed bundling shows gains in Scenario 3 by inducing more purchases. The optimal prices for the SE and Pro products are set at $400 and $1000 respectively, with various profit combinations calculated based on different pricing strategies. Additionally, the elasticity of demand is -0.05, indicating that the price change is profitable despite the break-even elasticity being -1.

Uploaded by

yanyanqiu2001
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
6 views2 pages

Bundling Strategies and Pricing Analysis

Bundling is more profitable in Scenario 2 due to negative correlation in demand between items, while mixed bundling shows gains in Scenario 3 by inducing more purchases. The optimal prices for the SE and Pro products are set at $400 and $1000 respectively, with various profit combinations calculated based on different pricing strategies. Additionally, the elasticity of demand is -0.05, indicating that the price change is profitable despite the break-even elasticity being -1.

Uploaded by

yanyanqiu2001
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Bundling

a) Bundling is more profitable in Scenario 2 compared to Scenario 1 because the demands for
Item 1 and Item 2 are negatively correlated in Scenario 2, while this is not the case in
Scenario 1.
a. Generally, there are 3 motivations, listed below, to offering mixed bundling
(relative to pure bundling). None of the below effects are present in Scenario 2,
thus there are no gains from mixed bundling relative to pure bundling.
i. Profitable to sell individual items to customers who would otherwise not
purchase the bundle (stimulation from market expansion)
ii. Profitable to move or induce self-selection of a customer from purchasing a
bundle to buying individual items (positive dilution)
iii. Profitable to increase the bundle price (margin and quantity trade-off)
b) Optimal prices increase with mixed bundling to prevent customers from trading down.
Mixed bundling has more gains compared to pure bundling in Scenario 3 because:
a. More customers who did not buy before are now induced to buy.
b. Presence of individual item purchase enables the firm to offer higher bundle prices
(margin and quantity trade-off). There are 3 effects to this:
i. Customers that move from buying bundle to not buy (loss)
ii. Customers that move from buying bundle to buying individual item (loss)
iii. Customers that stay with buying bundle (gain higher margin)
c) If the marginal cost of an item increases to $3, then for the case of pure bundling, we would
be selling units to customers who have a WTP for the item that is lower than our cost of
production. Therefore, a more profitable and efficient way to sell is to offer only the
individual component items for purchase.

Conjoint and EVC

See the conjoint_evc_practice.xlsx file.

Product Line Pricing

Part a: the optimal price is $400 for the SE and $1000 for the Pro.

Calculate the profit for each combination of prices, P_standard, P_pro

• (400, 500): unsophisticated user will buy the SE, and the tech savvy user will buy the pro,
earning you $900 in profit
• (400,1000): unsophisticated user will buy the SE, and the tech savvy user will buy the pro,
earning you $1400 in profit
• (500, 500): unsophisticated user will buy the pro, and the tech savvy user will buy the pro,
earning you $1000 in profit
• (1000,1000): unsophisticated user buys nothing and the tech savvy user buys the pro,
earning you $1000 in profit.

Part b:

Incentive compatibility tells us that (1000-Ppro)>=(500-Pstandard) for the tech savvy user, and
(400-Pstandard)>=(500-Ppro) for the unsophisticated user. Together this gives us that 500 >=
Ppro-Pstandard >=100.

Individual rationality gives us that Pstandard <= 400 & Ppro <= 1000.

Trying Pstandard = 400, we can price Ppro at 900 while satisfying the two requirements.

Trying Ppro = 1000, we cannot satisfy individual rationality for the unsophisticated user while
maintaining incentive compatibility for the high types.

Elasticity

a) The elasticity of demand is -0.05


b) The break-even elasticity is -1
c) The price change is profitable

You might also like